Microeconomics Final Review

Rebecca runs a small theater where she screens classic, cult, and foreign movies. She is not engaging in price discrimination when she:

charges 25 cents more for a large popcorn than for a medium popcorn. The marginal cost of a large popcorn is greater, so this is not necessarily price discrimination.

Lovely Lips spends an average of $1 on each tube of lipstick it manufacturers. If Samantha, Olga, Jolie, and Farah are willing to pay a maximum of $5, $6, $4, and $5, respectively, for a tube of Lovely Lips Fire Engine Red lipstick, and Lovely Lips is able to employ perfect price discrimination:

it will maximize gains from trade.

Bundling is most effective when the demand for the bundle is ________ than the demand for the individual products.

less variable

in free markets, surpluses lead to

lower prices

the opportunity cost of a choice is

the value of the opportunities lost

Megan needs to fly to Cincinnati for business. What is true of her demand curve?

It is more inelastic than that of vacationers also flying to Cincinnati.

Colleges often provided financial aid to students, enabling more students to attend college, leading to an increase in social welfare. What happens to output?

Output increases. Social welfare does increase when output rises.

Output falls when Mario's Cinema is able to price discriminate. What will happen to social welfare in this market?

Social welfare decreases when output decreases.

ABC Wiring increases output when it is able to price discriminate. What will happen to social welfare in this market?

Social welfare increases when output increases.

Suppose Gary is willing to pay $20 per month for The Food Network, $50 per month for MTV, and $1 per month each for 10 other channels he doesn't watch much. If Gary pays $80 for this cable TV bundle, is this a good example of perfect price discrimination?

Yes, it is, because he pays $20 per month for The Food Network, $50 per month for MTV, and $1 per month each for 10 other channels he doesn't watch much.

Ferrell Family Funeral Services is employing perfect price discrimination in a market. How much consumer surplus exists?

Zero consumer surplus exists. When a monopolist employs perfect price discrimination, he or she will receive all of the gains from trade in the market in the form of producer surplus.

Which case is not an example of tying products together? a) a company selling mechanical tabulating machines that only work with the punched cards that the company also sells b) a cable company selling channels in packages rather than individually c) HP selling printers at low prices and printer ink cartridges at relatively high prices d) a cellular phone company selling phones at low prices when the customers sign a two-year service contract with the company

a cable company selling channels in packages rather than individually This is an example of bundling, not tying.

Which of the following is NOT an example of price discrimination? a) Higher prices for higher-quality suits b) bundling of cable TV channels c) tying of printers and ink d) university financial aid

a) higher prices for higher-quality suits This is not price discrimination, because the marginal cost differs.

Microsoft selling Word and Excel together in Office is an example of _____, which is a type of price discrimination.

bundling

If the fixed costs in a particular industry are high but the cost of producing an additional unit of a good is low, then the industry might benefit from:

bundling.

arbitrage

buying low in one market and selling high in another market

Bundling is likely to be beneficial in the cable TV industry, because this industry has high _____ costs.

fixed

Price discrimination can increase social welfare in markets with high _____ costs, because it can allow the market—and the profits—to be larger.

fixed

Price discrimination decreases social welfare:

if it decreases output.

scarcity

is when there isnt enough to satisfy all our wants

Bundling is likely to be beneficial in the cable TV industry, because this industry has high fixed costs and low _____ costs.

marginal

The principles of price discrimination state that firms want to, but may not be able to:

set different prices in different markets.

If Paula's Printer Company is price discriminating by tying printers and ink, Paula's:

should make sure other companies cannot produce substitutable ink.

If GlaxoSmithKline (GSK) were not allowed to charge different prices for Combivir in Europe and Africa and instead had to charge one world price, whether this would increase or decrease total surplus would depend on two things: whether GSK chose a price lower than the current European price and whether:

the benefits to Europeans of this lower price offset the costs to Africans of the higher price.

If Paula's Printer Company is price discriminating by tying printers and ink:

the printers will be relatively low priced.

bill gates dropped out of college and founded microsoft. his opportunity cost continuing to attend college was

tuition, the cost of books, and the income from his Microsoft pursuits

In mid to late 1800s, railroad companies in the United States required those who wanted to use the rails to buy coal mined by the railroad company. This is an example of _____, which is a type of price discrimination.

tying

Price discrimination increases social welfare:

when output increases.